Monday, March 5, 2012

Central bank policy driving corporate spreads

People sometimes wonder why US credit managers spend so much time analyzing the monetary policy actions (or potential actions) of major central banks. Barclays Capital put the answer to this question on a single chart. The chart shows investment grade CDX (index of corporate investment grade CDS) spread in relation to the major policy decisions of the ECB and the Fed.

IG CDX spread

The start and end of each major accommodation tends to be near the inflection point in the credit markets. Clearly there are other factors involved in moving investment grade corporate spreads. But the bulk of these trends could potentially be explained by central banks' policy alone.